Following the implementation of the flexible foreign exchange policy in June this year, the Nigerian interbank end of the market has constantly been under pressure with the Central Bank of Nigeria having to intervene most times as liquidity became an issue.
Mostly, there would be large quantity of bids for foreign currencies with offers that could not match the demand, a situation that saw the value of the naira plummet from N197 in June to close to N335 last month.
To drive the much needed liquidity in the foreign exchange market, the apex bank had decided to attract foreign portfolio investments. Consequently, the Monetary Policy Committee of the CBN at its last meeting in July had raised benchmark interest rate by 200 basis points to 14 per cent and increased Standing Deposit Facility from seven per cent to nine per cent, a decision that surprised many analysts who had hoped that status quo would be maintained in favour of the country’s economic growth.
Although some analysts believed that the move would stifle the growth anticipated in the economy as the real sector would take the beating of higher interest rates, many believed that higher rates would lure foreign portfolio investments into the country.
Reacting to the hike in rates, Managing Director, Chief Economist, Africa Global Research at Standard Chartered Bank, Razia Khan, had said the monetary policy decision demonstrates a commitment to forex liberalisation, which is expected to undo some of the bottlenecks that have contributed to inflation.
Although the CBN has framed its internal debate as choosing between growth and inflation, Khan believes there is no meaningful long-term trade off. “Establishing more credible policy and attracting greater inflows is about as pro-growth as policy can be, given the challenges currently facing the Nigerian economy. Today’s tightening was an important step in re-establishing the credibility of monetary policy in Nigeria, and should allow for a gradual recovery in forex inflows.
To analysts at Cordros Capitalo, an upward adjustment of the MPR will support positive real interest rate, and increase liquidity of the forex market by attracting foreign inflows as negative real interest rate does not encourage investment, especially for FPIs.
Also recently, the CBN had revved up its drive to attract foreign investments into the country with road shows to the United States and United Kingdom, where it had gone to woo international investors, brief them on measures that have been put in place to safeguard their investments, reassure them of the viability of investing in the country.
The investment campaign, led by the CBN Governor, Godwin Emefiele, and assisted by Deputy Governor, Economic Policy, Sarah Alade, met with over 140 investors in London, about 50 in Boston, close to 90 in New York and 10 in Los Angeles, underscoring the determination of the apex bank to woo back foreign investments both in terms of foreign portfolio investments (FPIs) and foreign direct investments (FDIs).
These efforts may have begun to bring forth fruits as there had been a gradual improvement in market liquidity, a claim corroborated by a treasurer with one of the leading banks, recently. It has been observed that liquidity at the interbank foreign exchange market had improved with the naira gaining strength, although slightly at the official end.
The CBN attributed the improvement to its decision to truly float the currency as well as the recent investment drive in the US and UK, pointing out that both helped to restore confidence among some investors who had been sitting on the side-lines.
A treasurer of one of the leading banks had put the average rate of naira at N318.81 to the dollar adding that “It is noteworthy that the CBN’s contribution to the market was only three per cent of the total volume that was traded.”
Recently, there had been a single $270 million transaction at N345 per dollar by Citibank Nigeria which bought 11-months treasury bills on behalf of offshore investors, which saw the forex market recording up to $327 million worth of trades in a single day.
Average trading at the interbank market is put around $50 million a day on normal days, but might reach $100 million on days the apex bank intervenes in the currency market.
According to financial analyst and Head of Research at Sterling Capital, Sewa Wusu, the inflow is a likely indication that the strategy of the Central Bank of Nigeria to attract foreign portfolio investments into the country is making positive impact.
He told Leadership yesterday that the attractive yields at the Treasury bills market is luring foreign investors into the country. “Treasury bills market attractive right now and most investors calling in their investments and packing it into the Treasury bills market.
“Once flow of investors come in, it will be positive for the forex market and the reserves. The last MPC had decided to raise benchmark interest rates to attract foreign investors and once this happens, it will give support to the reserves and forex,” he said.